On February 8, 2019, the Land and Environment Court of New South Wales released its decision on whether to approve the Rocky Hill Coal Project after it had previously been refused by the state’s Planning and Assessment Commission in 2017. The Court rejected the Project based, in part, on climate change. This decision marks a historic moment, as it is possibly the first time a court has rejected a fossil fuel development project based on the cumulative impact of carbon emissions.

Background

Gloucester Resources Limited (GRL), a coal mining company, sought to overturn the 2017 decision by the New South Wales (NSW) Planning and Assessment Commission (PAC), which rejected GRL’s application to develop an open-cut coal mine at Rocky Hill in the Gloucester Valley of NSW. The mine, known as the Rocky Hill Mine Project, was proposed to produce 21 million tonnes of coal over 16 years. The PAC’s refusal of GRL’s application was based entirely on planning grounds, particularly the incompatibility of the proposed mine with other land uses in the vicinity.

The Land Environment Court of New South Wales (Court) was established in 1979 to hear appeals about mining and other projects on planning, environmental, land, mining and related grounds. The Court acts a ‘one stop shop’ for environmental, planning and land matters, and is the first specialist environmental superior court in the world.

Significantly, the Court allowed a local community action group, Gloucester Groundswell Inc., to be joined as a party to the proceedings. Gloucester Groundswell was concerned with the impacts of the Rocky Hill Coal Project on the local community and on the local and wider environment. Gloucester Groundswell hired experts to present evidence of the mine’s detrimental impact on not just the social fabric of the Gloucester valley but also climate change.

Decision

The Court’s decision was written by Chief Judge Brian Preston. Preston CJ held that the mine should be refused due to its significant and unacceptable planning, visual and social impacts, none of which could be satisfactorily mitigated.

What makes this decision ground breaking, however, is Preston’s CJ reasoning and commentary on the effects on climate change the proposed coal mine would have. Preston CJ conducted an exhaustive examination of evidence of climate change before the court, international and national decisions, international agreements and Australian climate policies, following which he rejected the project.

Evidence of Climate Change

The court heard from Emeritus Professor Will Steffen, an earth systems scientist, called by Gloucester Groundswell to give evidence on climate change science and the “carbon budget”. The “carbon budget” is the total allowable amount of carbon dioxide and other greenhouses gases that the world can emit without incurring a risk of exceeding the specific global average temperature of 1.5ºC. Professor Steffen summarized the impacts of climate change and concluded that any development of new fossil fuel reserves is incompatible with any carbon budget and with Australia’s commitments to the Paris Agreement and “is inconsistent with the carbon budget approach towards climate stabilization.” This was true despite the fact that the total GHG emissions of the Project would only constitute a small fraction of total global emissions, because all GHG emissions are important, as they cumulatively contribute to the destabilization of the global climate system.

GRL’s Argument for Approval

GRL did not contest that climate change is real and happening and that GHG emission must be reduced rapidly in order to meet the internationally agreed temperature targets of 1.5ºC or 2ºC. GRL did, however, contest that the Rocky Hill Coal Project needs to be refused in order to achieve these temperature targets. Essentially, GRL argued the Rocky Hill Coal Project by itself would not contribute to climate change and thus should be approved.

Reasoning

After a lengthy review of the evidence, Preston CJ agreed with Professor Steffen’s conclusion, and held the Project’s cumulative GHG emissions would contribute to future changes to the climate system and the impacts of climate change. This increase in GHG emissions caused by the Project would counter the measures being undertaken to limit climate change and would do nothing to assist Australia in meeting the globally agreed goals of the Paris Agreement, in particular the long term goal of limiting the increase in global average temperature to between 1.5ºC and 2ºC above pre-industrial levels.

Further, Preston CJ rejected GRL’s submission that the increase in GHG emissions associated with the Project would be offset by reductions in GHG emissions from other sources, none of which were actually identified by GRL. Preston CJ stated that an authority cannot approve a development that is likely to have some identified environmental impact on the theoretical possibility that the environmental impact will be mitigated or offset by some unspecified and uncertain action at some unspecified and uncertain time in the future. He noted that this was not a case where a project proponent committed to take specific and certain action to mitigate and offset the environmental impact of its proposed development.

Conclusion

In conclusion, Preston CJ held that the mine should be rejected as it was not in the public interest, concluding:

In short, an open cut coal mine in this part of the Gloucester valley would be in the wrong place at the wrong time. Wrong place because an open cut coal mine in this scenic and cultural landscape, proximate to many people’s homes and farms, will cause significant planning, amenity, visual and social impacts. Wrong time because the GHG emissions of the coal mine and its coal product will increase global total concentrations of GHGs at a time when what is now urgently needed, in order to meet generally agreed climate targets, is a rapid and deep decrease in GHG emissions. These dire consequences should be avoided. The Project should be refused.

GRL has stated it will assess the implications of the decision and consider its next steps. It has 28 days to appeal on a point of law to the New South Wales Court of Appeal.

The implications of this judgment, assuming it were to be followed in other jurisdictions such as Canada and Alberta, are enormous. On the Court’s reasoning, any major new fossil fuel project, including oil sands projects, would be “at the wrong time” and could be rejected on the basis of increased GHG emissions.

At issue was whether the province’s rules for cleaning up oil wells
frustrated the purpose of Canada’s federal bankruptcy regime. The SCC
held there was no conflict. As a result, the trustees of bankrupt oil
and gas companies can no longer disclaim remediation liabilities and
simply walk away from uneconomic oil and gas sites. Environmental
clean-up now takes priority over payments to creditors.

Background

As previously reported,
this case revolved around the assets of Redwater Energy Corporation
(“Redwater”), a public oil and gas company which was placed in
receivership in 2015 by Alberta Treasury Branch ("ATB"). Following an
application by ATB, Grant Thornton Limited (“GTL”) was appointed as the
receiver and trustee. Redwater had a number of non-producing oil wells
licensed by the Alberta Energy Regulator (the “Regulator”), which needed
to be reclaimed. The costs of abandoning and remediating these wells,
however, far outstripped their remaining economic value. As a result,
GTL sought to renounce or disclaim these unattractive assets.

In response, the Regulator ordered GTL to remediate the disclaimed
oil wells before distributing funds to creditors. It argued that
Redwater’s bankruptcy did not affect Redwater’s environmental
obligations and that GTL was legally required to discharge those
obligations before paying Redwater’s creditors. GTL brought a
cross-application challenging the Regulator’s position and seeking
approval of its sale.

Broadly speaking, the case pitted the public’s interest in ensuring
that oil and gas facilities are reclaimed against the interests of
secured creditors in the federal bankruptcy regime.

Lower Court Decisions

The key issue before the courts was determining the proper priority and treatment of environmental claims under the Bankruptcy and Insolvency Act (BIA).

The lower courts determined there was operational conflict between
the BIA and the province’s regulatory regime set out under the Oil and Gas Conservation Act (OGCA) and Pipeline Act
(PA). Based on the doctrine of paramountcy, the OGCA and PA were thus
rendered inoperable to the extent that their provisions would frustrate
the BIA’s system of distribution and priorities. Further, the courts
held that the Regulator’s orders were essentially unprotected monetary
claims and therefore unenforceable against a trustee and receiver.

As a result, the lower courts concluded that GTL did not have to
comply with the Regulator’s orders and could settle the claims of
secured creditors without fulfilling any of its environmental
remediation obligations.

Supreme Court Decision

In a 5-2 decision, the majority of the SCC ruled that Alberta’s
environmental regulatory regime can coexist alongside the scheme of
distribution set out under the BIA.

Rather than find the provincial and federal regimes to be
incompatible, the SCC determined that the Regulator’s orders were based
on valid provincial laws of general application – exactly the kind of
valid provincial laws that underpin the BIA. The BIA is clear that the
ownership of certain assets and the existence of particular liabilities
depend upon provincial law. In this case, the provincial laws provide
certain end-of-life obligations for Redwater’s production facilities
which define how much of the bankrupt’s estate is available for
distribution.

In other words, in crafting the priority scheme of the BIA,
Parliament intended to permit regulators to place a first charge on real
property of a bankrupt affected by an environmental condition or damage
in order to fund remediation and reclamation. Thus, the BIA explicitly
contemplates that environmental regulators will extract value from the
bankrupt’s real property if that property is affected by an
environmental condition or damage. Therefore, there is no conflict to
trigger the doctrine of paramountcy in this case. The Regulator’s orders
supersede the distribution.

The SCC also stated that bankruptcy is not a licence to ignore rules.
Redwater has remedial obligations that are not claims provable in
bankruptcy. Section 14.06(4) of the BIA is purely concerned with a
trustee’s personal liability, and does not empower the trustee to walk
away from the environmental liabilities of the estate it is
administering. Pursuant to orders of the lower courts, GTL had already
sold or renounced all of Redwater’s assets, and the sale proceeds were
being held in trust. Accordingly, the SCC ordered that these funds be
used to address Redwater’s end-of-life obligations and reclaim the well
sites.

Take Away

In overturning the lower courts’ ruling, the SCC has helped unravel
the tangled intersection between bankruptcy proceedings and provincial
environmental law, but this is a lengthy decision and its ramifications
will take time to fully assess and consider.

There is no question, however, that this case will have far-reaching
implications across several different industries nationwide. While
environmental regulators and advocates will consider this ruling a
significant victory, the decision also introduces uncertainty for
secured lenders in the oil and gas sector, as well as secured lenders to
other industries with potential for significant environmental
liability.

Brookfield Residential owns a parcel of land in south Edmonton that it intended to develop for residential purposes. In 2010, environmental testing revealed that the land was contaminated. In 2012, Brookfield Residential brought an action against Imperial Oil and others alleging that the contamination resulted from an oil well Imperial Oil drilled on the property in 1949. Imperial Oil applied for summary dismissal on the basis that the limitation period had expired. Brookfield Residential brought a cross-application to extend the limitations period under section EPEA section 218.

Limitation periods in contaminated site litigation are subject to unique legislation. The typical timeframes for commencing an action provided for under Limitations Act do not necessarily apply. In most cases, a party has 2 years to commence an action from when they discovered, or ought to have discovered, the circumstances giving rise to the claim, or no later than 10 years from when the wrongful act was committed in any event. EPEA section 218 gives the court discretion to extend these limitation periods in certain circumstances.

Factors the court must consider in an application under EPEA section 218 include: (1) when the contamination (adverse effect) occurred, (2) whether the plaintiff exercised due diligence in discovering the contamination, (3) prejudice to the defendant’s ability to maintain a defence, and (4) any other criteria the court considers to be relevant. Application of this provision is fact-specific and the court has discretion in how to apply it.

In its analysis, the Court of Appeal discussed the need to balance competing policy objectives found in environmental legislation, such as EPEA, against those that form the basis for limitation periods, as found in Alberta’s Limitations Act. The Court of Appeal found that EPEA reflects the objectives of “polluter pays”, and recognizes that contamination may be difficult to detect in some circumstances, where strict application of limitation periods may be unreasonable or unfair. However, those objectives need to be balanced against the rationale for limitation periods, for example, that defendants be protected from “ancient obligations”, disputes should be resolved while evidence is still available and witnesses’ memories are still fresh, and claimants ought to act in a timely manner.

Ultimately, the Court of Appeal upheld the Chambers Judge’s finding that Imperial Oil was sufficiently prejudiced in maintaining a defence that and accordingly, the limitation period should not be extended. Despite the finding that Brookfield Residential was duly diligent in discovering the contamination, the actions complained of occurred some 50 or 60 years prior to the claim being filed, and the prejudice to the defendant was the determinative factor. On that basis, Brookfield Residential’s application to extend the limitation period was denied, and the action against Imperial Oil was dismissed. The Court of Appeal found that the Chambers Judge considered the relevant factors, made no palpable and overriding error and accordingly, his discretionary decision in relation to EPEA section 218 should not be disturbed.

The Court of Appeal also took the opportunity to comment on another Queen’s Bench decision, Lakeview Village, and clarified the process for EPEA section 218 applications. The Chambers Judge in Lakeview Village created a test for determining if an application for extending the limitation period could appropriately be decided in a pre-trial application, or if it should be a matter for trial. However, the Court of Appeal in Brookfield rejected that approach, finding that it is inconsistent with the wording and intent of EPEA section 218. Rather, a motion to extend the limitation period should be decided in a pre-trial application, and deferring a section 218 application to trial defeats the whole purpose of the provision. The Court of Appeal expressly stated that the Lakeview Village approach should not be followed, and section 218 applications should be decided prior to trial.

The Court of Appeal’s decision in Brookfield is significant as it highlights the importance of prejudice to the defendant when considering limitation issues, and furthers the trend in Canada to resolve litigation in pre-trial summary applications, where appropriate. Additionally, the Brookfield decision clarifies the process for applications under EPEA section 218, which were subject to some uncertainty following the Lakeview Village decision in 2016.